Annie Lowrey has an excellent piece on the reemergence of the $1,000 down mortgage:
“Buy new with $1,000 down,” the advertisement says, the words resting atop a trim green clapboard house offset by a bright blue sky. “The time has come. Stop wasting rent check after rent check and start building equity in your own home. And with only $1,000 down, affordable monthly payments and no private mortgage insurance required, the dream is closer than you think.”
It sounds too good to be true. But it is true. This offer does not come from a subprime lender, looking to reel in thousands of unqualified and ill-advised homebuyers, only to slap them with add-ons, fees and variable rates. It is not a teaser or a trick. The advertisement references a program initiated by the National Council of State Housing Agencies and Fannie Mae, the taxpayer-backed, government-sponsored enterprise that buys up mortgages from lending banks.
This next bit is almost funny it’s so obvious:
But there are concerns and problems intrinsic to purchasing a home with almost no money down. First and foremost, if the housing market turns down even a fractional amount, the homeowner will go “underwater” immediately. If the price of the house falls by even a bit, he will owe more on the mortgage than the house is worth. If he needs to sell it, he needs to come up with extra cash to pay the bank back. And the fact that the homeowner only had a thousand dollars to put down in the first place implies that he does not have much financial breathing room and might default.
[…]“Haven’t they noticed what’s happened to the country in the past five years?” asks Dean Baker, the co-director of the Center for Economic and Policy Research. “You’re not necessarily helping if you’re helping them buy a home where they’re in the position they won’t be able to afford it. I don’t understand the logic of this. House prices are still going to fall. And when they do, we haven’t helped these people who are going to have to work like crazy to pay their mortgage off, or they’re going to default. If you’re in a situation where this is the only mortgage you can get, you shouldn’t be buying a house.”
Our uniquely American fascination with home-ownership is alive and kicking still it would appear, and tax dollars are being spent to maintain the obsession – in spite of the recent housing bubble and subsequent crash. As Yglesias notes, “Annie Lowrey’s story details the official reason why this time it’ll be different. As it always is. But I just didn’t expect this level of denial to re-emerge so quickly.”
Denial, alas, is as uniquely American as our obsession with home ownership, and just as unsustainable.
P.S.
Megan writes:
It’s true that this particular program is small–I don’t think the economy is going to be brought to its knees by several hundred houses. The important thing, however, is that this is how the government thinks about housing. The private bankers have at least reacted to their little scare by getting somewhat more conservative about the loans they offer–probably not conservative enough, but still, more conservative. The FHA, on the other hand, is still out there offering 3.5% mortgages to anyone who can meet some fairly basic guidelines; those mortgages now account for almost 20% of all home purchases. Yet so far, the FHA has cracked down in only one area: it now requires a 10% downpayment from buyers with very bad credit. On the other hand, it’s also expanded into pricier homes, so I’m not sure you can say the loan criteria have tightened overall.
I’m not sure it’s quite accurate to say “this is how the government thinks about housing”. This is how Americans think about housing. Or at least this is how Americans have thought about housing for a very long time, with the first few cracks in this particular mode of thought only showing up after the housing bubble popped.
A mortgage payment sits right at the beating heart of the American Dream. It’s not really surprising that politicians on both sides of the aisle constantly find new ways to get people into houses whether or not they can afford them. Not only is home ownership a driving force of the American economy, it’s part of our cultural mythos as well. Blaming government for this misses the underlying cultural factors which drive government’s actions in the first place. That doesn’t make the program at all better, and Megan may even be downplaying the risks a bit if the program really takes off in the future, but this is a problem that goes deeper than the actions of a few bureaucrats in the FHA.
jwb
And right on cue, I get a big ad under your article advertising 4.125% loan.
delurker
Capitalism says: Helping banks by subsidizing purchase of their assets that they can’t sell > Not screwing over poor people.
J sub D
Housing prices have yet to hit bottom. The government is doing all it can to maintain housing prices in a market that will not maintain them on its own.
Like King Canute, they will fail. We eithere take our medicine now or take far more bitter medicine later.
beltane
Anyone who does not have substantial equity in their home is a renter who owns nothing but debt, and the headache of maintaining a bank-owned property.
BombIranForChrist
It really is hard sometimes to find the line between healthy optimism and blinkered stupidity.
And then there are times when it’s not hard at all …
Ripley
So, gold instead, am I right?
Sentient Puddle
lolwut?
I see some people didn’t learn a goddamned thing from our latest subprime mess, where homeowners got in deep shit if home values stopped rising as fast as they did. But is it too much to ask that said people not control the levers?
Martin
Well, when salaries can’t keep pace with inflation, people look for other opportunities, and speculating in real estate is one such opportunity.
It would probably be cheaper all around for the government to push wages rather than bailing out all of the kittens-playing-in-the-shark-tank shit that’s going on.
burnspbesq
So much foolishness stems from the notion that your house is an investment asset. It’s housing. Owning is only cheaper than renting because of the implicit government subsidy (there is no good tax policy reason why home mortgage interest should be deductible).
I dated a girl in college whose parents still lived in the house the bought on a GI loan when they got married in 1947. In the summer of 1977, they made the last payment and had a party at which they ceremonially burned their mortgage. That, to me, is behavior worth emulating.
KG
@Sentient Puddle: um, the people who control the levers now are the same people who controlled the levers before. They know what will happen when the shit hits the fan, again, as it always does. That people are willing to go for these deals is also no surprise, people like the idea of owning their own home – if for no other reason it means they don’t have to worry about moving in a year or two, or having the price rise every year or two. They are looking for stability, but there are greater forces at work; particularly the forces betting on market failure.
Violet
Wow, this post triggered something in the ads and now the site is covered with FICO scores.
This seems really stupid to me. Maybe there’s something I don’t understand, but on the face of it, it’s dumb.
Mark
A guy I know just bought a place for $710,000 with an FHA loan. The price got bid up from $650,000 to the final price and it was no worries for him because FHA requires 3.5% down unlike the 20% I dropped for my place.
He’s been doing a ton of renovations and confided in me that he was financing everything on his credit cards.
PeakVT
Denial, alas, is as uniquely American as our obsession with home ownership, and just as unsustainable.
I think denial is the evil twin of endless optimism, which used to be a defining American characteristic. Reagan showed America that denying reality was easier than being optimistic that hard work will fix hard problems.
KG
@burnspbesq: actually, your home as an investment asset isn’t a bad idea if you think of it as an investment for your retirement. You pay off your mortgage, it’s worth more than it was 30 years ago, you decide to retire, you sell and downgrade, and then you have a nest egg for your retirement. The problem, I think, is that people started treating real estate as a short term investment; and unless you’re good enough/smart enough to flip houses, it really isn’t
Anton Sirius
Now how might I go about purchasing securities backed by these fine, extremely stable mortgages?
Pasquinade
Was Bush’s ‘ownership society’ cause of world economic meltdown?
When he was testifying before Congress the other day about the world’s economic crisis, former Bush Treasury Secretary John W. Snow said that too many unqualified people got loans. He suggested that one of the culprits might have been George W. Bush’s “ownership society.”
Borrowing the concept from conservative thinkers, President Bush began touting an ownership society early in his first term. The idea encompassed a range of policies — from healthcare to house buying — in which Republicans believed government should get out of the way and empower individuals to make their own financial decisions. In a fact sheet, the White House said:
The president believes that homeownership is the cornerstone of America’s vibrant communities and benefits individual families by building stability and long-term financial security.
Challenging the real estate and mortgage finance industries to “close the gap that exists between the homeownership rates of minorities and non-minorities,” the president argued that increasing homeownership would enroll everyone in the fabric of their communities, thus decreasing crime, improving schools and cementing a sense of local civic pride.
mr. whipple
This is so stupid it defies belief. And the minute these folks get underwater, they’ll be more calls for cramdown etc.
I need a drink.
Sentient Puddle
@KG: Lovely. So all I gotta do to get rich in the next few years is buy credit default swaps on however it is the banks will be packaging these home loans. I’d appreciate it if they kept the moronic CDO structure so that I can do a Steve Eisman-like “Whatever that guy is selling, I want to short it” style trade.
(Now will this post actually post this time, or will it get eaten again?)
wilfred
I don’t know about this. For working class people, most of whom would never be able to accumulate the money for a 30-40% down payment, this would depend on the cost of the house and the relation of their potential mortgage payments to rent.
I don’r recall the formula offhand but if a house cost, say, 90,000 dollars, the mortgage payment at 5-6% wouldn’t be that much greater than you’d expect to pay for rent. Am I wrong about this?
If you couldn’t pay after a few years, you haven’t loss that much, beyond wear and tear repairs.
May not be a bad play depending on the circumstances.
Corner Stone
@wilfred:
5%-6%
You mean the monthly nut? That is way too high.
In TX you can assume roughly 1% of the closing price as your monthly payment, more or less depending on the specific fees in the area.
So, in TX it would be under $1000 a month for the mortgage + escrow at an interest rate at/under 6%.
Maybe I am misunderstanding?
RobertB
I don’t see where this program is all that horrible. Given the current 30-year rate of 4.5% or thereabouts, it looks like your homebuyer will hit the 3.5% equity threshold pretty quickly (3-4 years), and the 10% number a couple of years after that. This assumes 30-year fixed, no change in the market up or down. For a $150K home, this works out to around a $1K/month mortgage.
It seems to me that this could be an effective, progressive program. If you could vet your buyers pretty well (no flippers, no liar loans), keep them out of toxic loan products (ARMs, etc), and treat the portfolio of these loans as an actuarial problem rather than a financial products resource, then those agencies would basically be footing the bill for the mortgage insurance. There’s really no real estate bubble left to burst to catch the buyers out in the cold.
Corner Stone
@RobertB:
There are quite a few metro areas that still have 20%+ to fall, IMO.
PTirebiter
I doubt this has anything to do with some obsession with home ownership. It’s about selling houses. Follow the lobbyists.
Corner Stone
@Corner Stone: Ah, think I read too fast. You mean $90K at 5% interest for a 30yr loan.
Given those terms it would still be commiserate with the cost of renting in most equitable locations.
Under $1000 monthly mortgage, mas o menos.
mai naem
Nothing wrong with buying a house. I don’t even have a problem with the $1,000 down bit. It would work for some people in certain situations although I do think people should put down at least $5K because it’s enough money that most people are going to care about losing it. A house is a great investment. I can’t think of another everyday product that one gets use of while probably having it’s value rise and furthermore, you get a tax writeoff
MattF
Yeah, but… living in an urban lower-middle class neighborhood and renting an apartment is un-American.
Jager
In the mid-70’s in the Boston Metro you could buy a new, 3 bedroom, 2 bath home for around $40,000. (in LA at the same time, a similiar house was about 10% higher) I bought mine in Ashland Ma with a 10% down, the PITI was $366 a month. I was making $2200. a month at the time, my wife stayed home with our babies, we had two cars, took a nice vacation a couple of times a year and lived really, really well for a couple of kids under 30. My old house has sold 4 times since I sold it in 1980 for $62,500, the last sale was for $595,000 two years ago. I wonder if the newest owners make ten times what I did in 74? I bet they don’t come close. I last saw the house in March, looked at my kid’s hand prints on the driveway, other than mature plantings and a different color its still the same old house. My pal who lived next door still lives in the house he and his wife closed on the same week we closed ours, he burned his mortgage in’04, he says the entire area has turned over at least 6 to 8 times since it was built.
Sly
I see nothing wrong with this program. I wouldn’t want the first-time homebuyer tax credit to be usable to cover the minimum down payment, but that looks like its been tossed out.
High home ownership is not something uniquely American, though that is a rather persistent myth. Home ownership rates have been steadily increasing among all but a few developed countries since the end of WWII, and there are quite a few countries in the OECD that have higher rates of home ownership than the United States. And home equity is no less safe an investment than anything else, save treasuries.
Garrigus Carraig
Wow, new guy. You just came into this particular room & quoted McMegan. GLWT.
Susan S
In 1969 my husband and I bought our first home for $300 down;it cost $15,000 and I was “underwater” immediately…but the payment was less than we had been paying in rent, we had a home to paint and carpet and raise our children. I sold it in 1976, put the proceeds[about $1500 if I remember] in a home in eastern Washington with my second husband. He still owns that home; I rented for two years,then scraped myself back into a home in the Montlake area of Seattle…again, barely able to afford it. I paid $105,000 for the place..with inlaid floors, coved ceilings, a mess but my children and I loved it. I owned that home for thirty years..my daughter went through Williams College and UMichigan Law on loans from its equity; at the height of the real estate boom it was worth more than $1,000,000.
My point: Not all of us have parents who can help with down payments; some young people just have the great desire to own their own home, deduct the mortgage interest, in Washington state deduct the real estate taxes..none of which applies if you rent. I rent now because I am older, don’t want the burden. But my children blossomed because we owned our own home; it would never have happened without that first, $300 downpayment. Why shouldn’t we let young people at least try to own a home? I think the $1000 down is a brilliant idea; we need a national program for such.
Litlebritdifrnt
The problem is not the original mortgages, it is the HELOC’s which people end up using as an ATM. Most people had a mortgage based upon the value of their home when they bought it, and there was no underwater problem. The problem arose when house prices went through the roof and they then acquired a HELOC based upon invisible equity. When the housing market tanked, guess what? The HELOC had no collateral. I think it was Doug that posted a link to a CA Real Estate blog a while ago which rates folks “HELOC abuse” on a scale (Irving perhaps). One couple got a HELOC of $145,000.00 and then were foreclosed upon, the mortgage holder got their $ from the house but the HELOC company was SOL, with the homeowners basically pocketing $145,000 and all it cost them was bad credit for 7 or ten years.
PTirebiter
@Pasquinade:
When he was asked about Bush’s “ownership society” on Charlie Rose, Warren Buffet went old school, calling it “sharecropping”.
CalD
Correct. Governments aren’t organisms. They can’t think. What thinking gets done (and sometimes I think that ain’t much) is done by people. And those people are, at some point, us.
mai naem
@Susan S: You said it way better than I ever could. I don’t mean to sound like the infomercial guy, but I know people paying $750-$1200 in rent which is stupid when you can buy a place for that much, if not less. I am not talking about flipping or owning a mansion, just a halfway decent home. We bought our first house for $70K twenty years ago and it’s still worth $200k in a crappy market.
Jager
I should add that on our first house we didn’t use any government programs or borrow any money from our parents. We saved the 4k for the downstroke over a couple of years and the best part was we had the mortgage from the kind of an institution that doesn’t exist anymore, a good old Savings Bank, local, invested in its community and very happy to extend long term mortgages to young couples they deemed worthy. I remember sitting across from the president of the bank, so worried that we wouldn’t qualify for the loan and also being so happy when got it we went out and had pizza and beer, I even put the top down on my MGB!
We have friends here in SoCal who are so house poor they eat grilled cheese and tomato soup 4 times a week, but they live in a $1,000,000 house
Frank
@Susan S:
I think it is wonderful provided nobody is expecting innocent people to have to bail out these people and the banks if the real-estate goes down big again.
I have a very conservative (with money) friend who didn’t buy house until very recently when he was 41 years old. At that point, he had saved 25% of the cost for a house that he used for a down payment. He got a 15 year fixed mortgage.
I admire him but I also feel sorry for him. While he was saving for his house, he also had to bail out those people that bought a house with no money down based on some exotic variable rate. And while he was saving, he subsidized those people that had bought houses with his taxes.
Corner Stone
Mr. Kain ~
WTF is wrong with you?
PTirebiter
@Frank: I understand your point but your emphasis on the buyers here is misplaced.
We covered lenders’ losses , not the borrowers.
Litlebritdifrnt
We would have had our mortgage paid down years ago had it not been for Hurricane Floyd. We did not have flood insurance, (not in a flood zone), so when Floyd hit we had no way of covering the losses and rebuilding. FEMA came in and due to our income gave us an SBA loan. Which the SBA then sold to the nastiest loan shark on the planet. When we got behind they threatened all sorts of nastiness (including foreclosure) we eventually had to jump out of the frying pan and into the fire of a high interest loan to consolidate the two. We are still in our home, and now have quite a chunk of equity in it, but guess what? I am not touching it.
Jager
If you look at median home prices vs median income in the same area, you kind of go WTF? People in the job I had in ’74 don’t make 10 times what I made, they make 4 to 5 times more than I did and the “market” thinks they can afford houses that cost 12 to 15 times as much as they did in the 70’s…it does not calculate! They couldn’t do it without exotic mortgages or government support. (or the interest tax deduction) The pricing, the size of the homes is crazy, if you watch HGTV you go, what the hell does a couple with 2 small kids need a 5 bedroom, 4 bath house for? Like my neighbor said, “for what I paid extra for that 4th bedroom, i could put my in laws up in the Beverly Hills Hotel for the week a year they spend with us and I could do it until they both were in Depends”
fourmorewars
Speaking of questionable home lending stories, I’m driving around listening to my liberal talk show station a few months ago, when on comes a commercial offering home loans…from a payday lending company.
Sign of the apocalypse?
Frank
@PTirebiter:
You are correct. And I wasn’t clear enough.
But also, I have read enough articles showing examples of where homeowners are simply abandoning their homes because they are under water. It is not like the banks were eating this cost. They were bailed out by the tax payers. And then I go back to my 41 year old pal who is so conservative with money and would never take the type of risk that would get him under water. It just doesn’t seem fair.
I haven’t read the details of the new financial regulation bill that was approved. But I sure hope there are much tighter regulations on bank lending.
arguingwithsignposts
You’re quoting McMegan? Her calculator doesn’t even go that high!
I’m seconding Corner Stone’s question.
Joel
While the low-money-down aspect of mortgages is getting the press, it’s the jumbo loans and the million-plus mortgages that are the worst investment from the banks’ retrospective. Wish we’d investigate some more on those…
Joel
While the low-money-down aspect of mortgages is getting the press, it’s the jumbo loans and the million-plus mortgages that are the worst investment from the banks’ retrospective. Wish we’d investigate some more on those…
John S.
I see a trend emerging. Mr. Kain throws up some “well reasoned” nonsense, links to an equally nonsensical source, and then calls it a day. I have yet to see him actually defend his views in any meaningful way.
Roger Moore
@KG:
I see it a little bit differently. The biggest thing you’re doing is concentrating your housing costs into the most productive time of your life. Once the mortgage is paid off, your housing costs drop to maintenance plus property tax. That’s convenient because your income will probably drop when you retire. As long as your mortgage payment plus property tax isn’t much bigger than a rent would be, it’s a sensible way to plan ahead.
jake the snake
I am ambivalent about this at the most.
In 1980, my wife and I got a no no down payment loan from the Kentucky Housing Corporation, which was the state equivalent of an FHA loan. The loan was at 8.5 % which was good at the time. The mortgage payment was at the maximum we could afford. Within a year, we took additional debt to put in central air conditioning. Of course, at that time housing prices were going up at a reasonable rate and after a few years we were able to sell it for enought profit to put 10% down on a larger house.
However, with the economic situation we have now, I don’t think this is nearly as workable as it was 30 years ago.
Corner Stone
@John S.:
It sounds a lot to me like The Atlantic Circle Jerk.
Leo
Jesus, that’s stupid. What causes someone to think that quoting a source that is routinely excoriated on the front page of this site — without any discussion of the issue — is going to do anything other than make him look like anything but a horse’s ass?
(edit to add a crucial word)
PTirebiter
@Frank: No it isn’t fair and not just to those who had uber-responsible mortgages. Think of all the fiscal conservatives (my folks) who never in their lives even considered buying a bond rated less than AAA only to discover that ratings agencies had been auctioning off grades.
Midnight Marauder
These words should only be written by DougJ as he proceeds to righteously shine the light on McMegan’s all-galaxy ignorance and inanity.
If you are seriously going to be posting here and citing Megan Fucking McArdle as a legitimate source, your credibility will be nonexistent.
Like, I cannot even express to you how much of a dealbreaker citing Megan McArdle is for someone’s intellectual seriousness.
FormerSwingVoter
If I recall, Lowrey’s pretty liberal, as is the CEPR. But quoting McMegan agreeing with your point can only be followed with “I guess I was wrong after all”
pseudonymous in nc
It’s the consequence of a market where there’s often no reasonable private rental sector (because the market is full of buy-to-rent speculators) or social housing (because that’s where Those People live).
Liberty60
For the entire living memory of everyone reading this, all the powers that control housing- politicians, banks, realtors, the construction industry- have furiously pushed homeownership as something more than housing, more than even a good investment, it is pushed and sold as the essential ingredient of any satisfactory life.
No wonder that even when people could not afford it, we found ways to get people into houses. The inaffordability of housing began a decade or more ago, when wages stagnated- no one noticed, only because of the convenience of continuing buying binges fueled by real estate debt.
Now we have a population with massive debt, no equity, and wages that will likely decline for the next decade.
Frank
@PTirebiter:
Yup. It has been sickening to learn that the people in charge were so reckless, selfish and outright criminal.
Nellcote
That’s cheaper than renting a crappy studio apartment in CA.
According to the article buyers are well vetted so that the defaults with FHA loans are only about 1.8%.
matoko_chan
Wow…..McMegan is the Dean of the University of Wrong.
is this place turning into the Atlantic left?
I’d advise against quoting her and misogynistic creeper Chunky Reese Witherspoon Douthat if you want to survive here.
Tim Connor
You are supposed to be capable of actual information processing.
Quoting McArdle is no way to prove it.
Gian
in econ analysis, it’s fine to argue by citing an authority in the field. By way of comparison, arguing from McArdle, is rather akin to arguing from a moon-landing denier conspiracy theorist instead of Steve Squyres when talking about Mars Rovers
http://en.wikipedia.org/wiki/Steve_Squyres
(note our then 4 year old was tickled to meet one of the guys who worked with Steve on the mars rovers at a JPL open house, I mean thrilled)
Horatius
Dude,
Stop linking to that idiot blogger from the Atlantic. That woman has never been right about anything ever.
Laura Morton
I do not feel that now is the right time to launch a $1,000 down payment mortgage. The housing mortgage is still fragile. Recovery is about 2 years away. We need the job figures to read something like “unemployment at 8.5% and getting better”.
In any case, my understanding about the deal is the the FHAs will buy back any mortgages that default. If this is correct then the damage will only be at the state level. I do not live in Wisconsin, so not much of my tax dollars will be down the drain.